SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended - September 30, 2008.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30392
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
(Exact name of Company as specified in its charter)
Florida 13-4172059
- ------------------------------ ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
335 Connie Cr.
Concord Ontario Canada L4K 5R2 (Address of principal
executive offices, including postal code.)
(905) 695-4142
(Registrant's telephone number, including area code)
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | | Accelerated Filer | | Non-Accelerated Filer | | (Do
not check if a smaller reporting Smaller reporting company [x] company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
There were 72,973,851 shares of the registrant's Common Stock outstanding as of
November 10, 2008.
FORM 10-Q
ENVIRONMENTAL SOLUTIONS WORLDWIDE INC.
TABLE OF CONTENTS
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets as of
September 30, 2008 (unaudited) and December 31, 2007 3
Consolidated Condensed Statements of Operations and
Comprehensive Loss for the Three Months and Nine Months
Ended September 30, 2008 and 2007 (unaudited) 4
Consolidated Condensed Statements of Changes in
Stockholders Equity (Deficit) for the Nine Months
Ended September 30, 2008 5
Consolidated Condensed Statements of
Cash Flows for the Nine Months Ended
September 30, 2008 and 2007 (unaudited) 6
Notes to Consolidated Condensed Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. 31
Item 6. Exhibits. 31
2
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
ASSETS
Current assets
Cash and cash equivalents (Note 4) $ 22,127 $ 2,891,088
Accounts receivable, net of allowance 476,843 271,703
for doubtful accounts of $19,410 (2007 - $NIL) (Note 2)
Inventory (Note 5) 999,704 1,030,843
Prepaid expenses and sundry assets 175,196 138,713
------------ ------------
Total current assets 1,673,870 4,332,347
Property, plant and equipment under construction (Note 6) 132,389 18,622
Property, plant and equipment, net of accumulated
depreciation of $ 3,274,031 3,578,026 4,105,746
(2007 - $2,460,565) (Note 6)
Patents and trademarks, net of accumulated
amortization of $1,634,884
(2007 - $1,475,077) 494,007 649,196
------------ ------------
$ 5,878,292 $ 9,105,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 729,628 $ 145,352
Accrued liabilities 688,435 459,533
Notes payable to related party (Note 7) 4,378,737 3,310,737
Bank loan (Note 8) 313,430 --
Redeemable class A special shares (Note 9) 453,900 453,900
Current portion of capital lease obligation (Note 14) 13,336 13,032
------------ ------------
Total current liabilities 6,577,466 4,382,554
Long Term Liabilities
Capital lease obligation (Note 14) 20,567 29,482
------------ ------------
Total liabilities 6,598,033 4,412,036
------------ ------------
Commitments and contingencies (Note 14)
Stockholders' Equity (Note 11)(Note 12)
Common stock, $0.001 par value, 125,000,000
shares authorized; 72,973,851 shares
issued and outstanding 72,972 72,972
Additional paid-in capital 25,679,407 25,665,761
Accumulated other comprehensive income 342,316 450,318
Accumulated deficit (26,814,436) (21,495,176)
------------ ------------
Total stockholders' equity (719,741) 4,693,875
------------ ------------
$ 5,878,292 $ 9,105,911
============ ============
The accompanying notes are an integral part of these financial statements
3
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue
Net sales $ 445,775 $ 2,443,763 $ 584,261 $ 8,971,030
Cost of sales 319,639 859,572 424,283 3,226,551
------------ ------------ ------------ ------------
Gross profit 126,136 1,584,191 159,978 5,744,479
------------ ------------ ------------ ------------
Operating expenses
Marketing, office and general costs 836,498 913,317 2,852,191 2,755,657
Research and development costs 200,923 257,573 1,044,215 550,642
Officers' compensation and directors fees 148,166 129,000 444,478 1,095,235
Consulting and professional fees 17,253 11,817 107,226 41,184
Foreign exchange (gain) / loss (7,926) 104,942 (65,372) 155,893
Depreciation and amortization 283,233 285,597 853,353 823,123
------------ ------------ ------------ ------------
1,478,147 1,702,246 5,236,091 5,421,734
------------ ------------ ------------ ------------
(Loss) and income from operations (1,352,011) (118,055) (5,076,113) 322,745
Write down of property, plant and
equipment and patents $ -- $ -- $ -- $ (140)
Interest on long term debt -- (49,636) -- (171,636)
Interest on notes payable to related party (101,775) (75,104) (263,764) (209,178)
Interest Income 585 16,406 20,617 34,730
------------ ------------ ------------ ------------
Net (loss) $ (1,453,201) $ (226,389) $ (5,319,260) $ (23,479)
------------ ------------ ------------ ------------
Other comprehensive (loss):
Foreign currency translation of
Canadian subsidiaries (26,670) -- (108,002) --
------------ ------------ ------------ ------------
Comprehensive (loss) $ (1,479,871) $ (226,389) $ (5,427,262) $ (23,479)
------------ ------------ ------------ ------------
(Loss) per share (Basic and diluted) $ (0.02) $ (0.00) $ (0.07) $ (0.00)
============ ============ ============ ============
Weighted average number of shares outstanding 72,973,851 61,645,511 72,973,851 60,481,262
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008
(UNAUDITED)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2006 59,753,240 $ 59,752 $ 18,243,710 $ -- $(19,331,555) $ (1,028,093)
Net Loss -- -- -- -- (2,163,621) (2,163,621)
Stock based compensation -- -- 776,271 -- -- 776,271
Common stock issued from
exercise of options 655,000 655 292,345 -- -- 293,000
Common stock issued for services 6,722 6 4,994 -- -- 5,000
Issuance of common stock for
interest on debentures 338,889 339 243,661 -- -- 244,000
Issuance of common stock for
principal on debentures 12,200,000 12,200 6,087,800 -- -- 6,100,000
Common stock issued from
exercise of warrants 20,000 20 16,980 -- -- 17,000
Foreign currency translation
of Canadian subsidiaries -- -- -- 450,318 -- 450,318
December 31, 2007 72,973,851 $ 72,972 $ 25,665,761 $ 450,318 $(21,495,176) $ 4,693,875
------------ ------------ ------------ ------------ ------------ ------------
Net loss -- -- -- -- (5,319,260) (5,319,260)
Stock based compensation -- -- 13,646 -- -- 13,646
Foreign currency translation
of Canadian subsidiaries -- -- -- (108,002) -- (108,002)
------------ ------------ ------------ ------------ ------------ ------------
September 30, 2008 $ 72,973,851 $ 72,972 $ 25,679,407 $ 342,316 $(26,814,436) $ (719,741)
The accompanying notes are an integral part of these financial statements
5
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
2008 2007
----------- -----------
Net Loss $(5,319,260) $ (23,479)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 813,466 782,598
Amortization 159,807 158,974
Provision (Recovery) for uncollectible accounts 19,410 --
Interest on long term loans -- 171,636
Interest on notes payable to related party 263,764 234,575
Amortization of debenture warrant fair value -- 123,803
Common stock issued for services provided -- 5,000
Loss on disposal of property, plant and equipment -- 140
Stock based compensation 13,646 776,271
Write down of Inventory 28,933 --
----------- -----------
1,299,026 2,252,997
Increase (decrease) in cash flows from operating activities resulting from
changes in:
Accounts receivable (224,550) (1,218,196)
Inventory 2,206 386,584
Prepaid expenses (36,483) (41,510)
Accounts payable and accrued liabilities 549,414 (756,408)
----------- -----------
290,587 (1,629,530)
----------- -----------
Net cash used in operating activities (3,729,647) 599,988
----------- -----------
Investing activities:
Acquisition of property, plant and equipment (285,746) (353,145)
Property, plant and equipment under construction (113,767) (30,105)
Increase in patents and trademarks (4,618) (11,190)
----------- -----------
Net cash used in investing activities (404,131) (394,440)
----------- -----------
Financing activities:
Bank Loan 313,430 --
Repayment of notes payable to related party -- (500,000)
Notes payable from related party 1,068,000 1,085,340
Issuance of common stock -- 310,000
Capital lease obligation (8,611) (5,097)
----------- -----------
Net cash provided by financing activities 1,372,819 890,243
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,760,959) 1,095,791
Effect of foreign currency exchange rate on Canadian subsidiaries (108,002) 198,314
Cash and cash equivalents, beginning of year 2,891,088 1,393,294
----------- -----------
Cash and cash equivalents, end of period $ 22,127 $ 2,687,399
=========== ===========
Supplemental disclosures:
Interest received $ 20,617 $ 34,730
=========== ===========
The accompanying notes are an integral part of these financial statements
6
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Environmental Solutions Worldwide Inc. (the "Company" or "ESW") is engaged in
the design, development, manufacturing and sales of environmental technologies
and testing services with its primary focus on the international on-road and
off-road diesel market. ESW currently manufactures and markets a line of
catalytic emission control and enabling technologies for a number of
applications.
The unaudited condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United Sates of
America ("US GAAP"), which contemplate continuation of the company as a going
concern. The Company, however, has sustained operating losses and presently
lacks a sufficient source of commercial income, which creates uncertainty about
the Company's ability to continue as a going concern. The Company's ability to
continue operations as a going concern and to realize its assets and to
discharge its liabilities is dependent upon obtaining additional financing
sufficient for continued operations as well as the achievement and maintenance
of a profitable level of operations. Management believes the current business
plan if successfully implemented may provide an opportunity for the Company to
achieve profitable operations and allow it to continue as a going concern.
The Company has incurred significant losses to date. As of September 30, 2008,
the Company has an accumulated deficit of $26,814,436. Although as at September
30, 2008, the Company's balance sheet has a negative working capital position,
the Company was successful in its pursuit of various financing initiatives; and
on November 3, 2008, the Company raised an additional $6.0 million through the
issuance of convertible debentures. (See Note 16). However, there is no
assurance that the Company will be successful in achieving sufficient cash from
operations. If the Company is unsuccessful, the Company may be required to
significantly reduce or limit operations and or seek additional funds. The
application of the going concern basis is dependent upon the Company obtaining
additional financing to fund its continuing operations and meet its obligations
as they come due.
These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern for a reasonable period of
time.
These statements have not been audited and should be read in conjunction with
the financial statements and the notes thereto included in our Annual Report on
Forms 10-KSB, and amendments thereto, as filed with the United States Securities
and Exchange Commission for the year ended December 31, 2007. The methods and
policies set forth in the year-end audited consolidated financial statements are
followed in these interim consolidated financial statements.
All adjustments considered necessary for fair presentation and of a normal
recurring nature have been included in these interim consolidated financial
statements. Revenues and operating results for the nine months ended September
30, 2008 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, ESW America Inc., ESW Technologies
Inc., ESW Canada Inc. and BBL Technologies Inc. All inter-company transactions
and balances have been eliminated on consolidation. Amounts in the condensed
consolidated financial statements are expressed in U.S. dollars.
7
ESTIMATES
The preparation of consolidated financial statements in conformity with
Generally Accepted Accounting Principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expense during the reported period. Actual results could differ from those
estimates. Significant estimates include amounts for valuation of intangible
assets, share-based compensation, inventory and accounts receivable exposures.
CONCENTRATIONS OF CREDIT RISK
The Company's cash balances are maintained in various banks in Canada and the
United States. Deposits held in banks in the United States are insured up to
$100,000 ($250,000 per depositor through December 31, 2009) for each bank by the
Federal Deposit Insurance Corporation. The balances at times may exceed these
limits.
Accounts Receivable and Concentrations of Credit Risk: The Company performs
on-going credit evaluations of our customer's financial condition and generally
does not require collateral from our customers. Three of our customers accounted
for 48.7%, 15.9%, and 10.3%, respectively of the Company's revenue for the nine
months ended September 30, 2008 and 55.9%, 17.9%, and nil, respectively of its
accounts receivable as at September 30, 2008. Three of our customers accounted
for 90%, 2%, and 1%, respectively of the Company's revenue as at December 31,
2007 and 56%, 2%, and 0%, respectively of its accounts receivable as at December
31, 2007.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated credit risk by performing credit checks
and actively pursuing past due accounts. An allowance for doubtful accounts is
estimated and recorded based on management's assessment of the credit history
with the customer and current relationships with them. On this basis, management
has determined that a reserve of $19,410 was appropriate as at September 30,
2008 and that a reserve of nil was appropriate as at December 31, 2007.
PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION
The Company capitalizes at cost, customized equipment built to be used in the
future day to day operations. Once complete and available for use, the cost for
accounting purposes is transferred to property, plant and equipment, where
normal depreciation rules apply.
PATENTS AND TRADEMARKS
Patents and trademarks consist primarily of the costs incurred to acquire them
from an independent third party. The Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets," requires intangible
assets with a finite life be tested for impairment whenever events or
circumstances indicate that a carrying amount of an asset (or asset group) may
not be recoverable. An impairment loss would be recognized when the carrying
amount of an asset exceeds the estimated discounted cash flow used in
determining the fair value of the asset. We conducted our test for impairment in
the fourth quarter of 2007 and found no impairment.
Patents and trademarks are being amortized on a straight-line basis over their
estimated life of ten years. Amortization expense for the period ended September
30, 2008 and 2007 were $159,807 and $158,974 respectively.
INVENTORY
Inventory is stated at the lower of cost (first-in first-out) or market.
Inventory is periodically reviewed for use and obsolescence, and adjusted as
necessary. Inventory consists of raw materials, work in progress and finished
goods.
8
REVENUE RECOGNITION
The Company derives revenue primarily from the sale of its catalytic products.
In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition",
revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the amount is fixed or determinable, risk of ownership
has passed to the customer and collection of the resulting receivable is
reasonably assured.
The Company also derives revenue (less than 3.9% of total revenue) from
providing air testing and environmental certification services. Revenues from
these services are recognized upon performance of service.
RESEARCH AND DEVELOPMENT
The Company is engaged in research and development work. Research and
development costs, other than for the acquisition of property, plant, and
equipment, are charged as operating expense of the Company as incurred. Any
grant money received for research and development work will be used to offset
these expenditures. For the nine month period ended September 30, 2008 and 2007
the Company expensed $1,044,215 and $550,642 respectively towards research and
development costs. For the nine month period ended September 30, 2008 and 2007,
grant money amounted to $224,430 and nil, respectively.
SEGMENTED REPORTING
SFAS Number 131, "Disclosure About Segments of an Enterprise and Related
Information", changed the way public companies report information about segments
of their business in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues
and its major customers.
For the period ended September 30, 2008, all revenues we generated from the
United States.
NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133
("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
and its related interpretations, and (3) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years beginning after November 15,
2008. The Company will be required to adopt SFAS 161 in the first quarter of
2009. We currently do not have any derivative financial instruments subject to
accounting or disclosure under SFAS 133; therefore, we do not expect the
adoption of SFAS 161 to have any effect on our consolidated statement of
financial position, results of operations or cash flows.
9
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how a company recognizes assets acquired, liabilities assumed, contractual
contingencies and contingent consideration measured at fair value at the
acquisition date. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effect of the business
combination. SFAS 141R is effective for fiscal years beginning after December
15, 2008. The Company will consider the effect of SFAS 141 and its impact on any
future acquisitions.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interest of the
parent and the interest of the noncontrolling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect the
adoption of SFAS 160 to have any impact on its financial position, results of
operation or cash flows.
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - including an amendment
of FASB Statement No. 115," (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other assets and liabilities at
fair value on an instrument-by-instrument basis (the fair value option). SFAS
159 becomes effective for the Company on January 1, 2008. The Company has
evaluated the adoption of this statement and concluded that it did not have any
material impact on the financial statements.
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase.
NOTE 5 - INVENTORY
Inventory is summarized as follows:
SEPTEMBER 30, 2008 DECEMBER 31, 2007
------------------ -----------------
Raw materials $ 664,825 $ 761,832
Work-In-Process 228,757 251,358
Finished goods 106,122 17,653
---------- ----------
$ 999,704 $ 1,030,843
========== ==========
10
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, 2008 December 31, 2007
------------------ -----------------
Plant, machinery and equipment $ 5,125,505 $ 4,966,177
Office equipment 292,710 242,098
Furniture and fixtures 424,426 421,550
Vehicles 12,014 12,014
Leasehold improvements 997,402 924,472
----------- -----------
6,852,057 6,566,311
Less: accumulated depreciation (3,274,031) (2,460,565)
----------- -----------
$ 3,578,026 $ 4,105,746
=========== ===========
As at September 30, 2008 and December 31, 2007, the Company had $132,389 and
$18,622, respectively, of customized equipment under construction.
The office equipment above includes $17,665 in assets under capital lease with a
corresponding accumulated depreciation of $10,839 at the period ended September
30, 2008. As at December 31, 2007 office equipment included $17,665 in assets
under capital lease with a corresponding accumulated depreciation of $7,879.
The Plant, machinery and equipment above includes $33,957 in assets under
capital lease with a corresponding accumulated depreciation of $9,966 at the
period ended September 30, 2008. As at December 31, 2007, Plant, machinery and
equipment above includes $33,957 in assets under capital lease with a
corresponding accumulated depreciation of $4,347.
NOTE 7 - NOTES PAYABLE TO RELATED PARTY
The Company has two unsecured subordinated promissory notes in the principal
amount of $2,308,148 and $1,002,589 respectively. It also has a total of seven
unsecured subordinated promissory notes totaling in the principal amount $
1,068,000. These seven notes are part of a series of draw downs against a Credit
Facility Agreement.
In accordance with the terms of the Consolidated Note in the principal amount of
$2,308,148, same will be due and payable to Holder upon demand. The Consolidated
Note bears interest at a rate of 9% per annum if principal and interest are paid
by the Company in cash, or if principal and interest are paid in shares of
restricted common stock of the Company, the Consolidated Note will bear interest
at a rate of 12% per annum. The Company may repay the Consolidated Note without
penalty at any time. The Note was issued to a company controlled by a trust of
which a director and shareholder of our Company is the beneficiary. The holder
of the Note has the option to receive payment of principal and all accrued
interest in the form of restricted shares of the Company's common stock, par
value ($0.001) with cost free piggyback registration rights. Under this
repayment option, interest will be calculated at 12% per annum.
The Consolidated Note in the principal amount of $1,002,589 bears interest at a
rate of 9% per annum and is payable upon demand. The Company may repay the
Consolidated Note without penalty at any time. The Note was issued to a director
and shareholder of our Company.
As at September 30, 2008 and December 31, 2007 $499,168 and $258,855,
respectively, of interest payable has been accrued on the two promissory notes
in the total principal amount of $3,810,737.
11
Effective June 2, 2008 the Company entered into a Credit Facility Agreement with
Bengt Odner a director and shareholder of the Company. Pursuant to the
Agreement, the Company can request draw down(s) under the Facility of up to
$1,500,000 in the aggregate with funds to be used for general working capital
purposes. All request(s) to draw down under the Facility are subject to Mr.
Odner's consent and approval. An approved draw down by the Company under the
Facility will be represented by a 9% unsecured subordinated demand promissory
note issued by the Company to Mr. Odner or his designee. The Company may repay
the Note at anytime without penalty. At the option of the Note holder, in lieu
of cash, principal and interest earned on the Note can be repaid in restricted
common stock of the Company. Should the Note holder elect to receive stock of
the Company, interest on principal will be calculated at a rate of 12% per
annum. The number of shares of Common Stock to be issued in satisfaction of
interest and principal shall be determined by dividing the principal and accrued
interest by the greater of 105% of the twenty (20) day average closing price of
the Company's Common Stock immediately preceding the date the Note holder elects
to have the Note satisfied with Common Stock, or the Closing Price on that date.
Under no circumstance can the conversion price be below the fair market price of
the Company's Common Stock on the date the Note holder elects to have the Note
satisfied with Common Stock. The Company may request draw down(s) under the
Facility through December 31, 2008.
On June 2, 2008, concurrent with entering into the Credit Facility Agreement,
the Company issued a Request for Issuance pursuant to the terms of the Facility
for the sum of $500,000 with said funds to be used for general working capital.
The Request for Issuance was approved and the Company issued a $500,000 Note in
favor of Mr. Odner. Subsequently, six requests totaling $568,000 were issued and
were approved. As at September 30, 2008 $23,481 of interest payable has been
accrued on the seven promissory notes in the total principal amount of
$1,068,000. (See Note 16 Subsequent events, for details on the repayment of all
outstanding Notes.)
NOTE 8 - BANK LOAN
Effective September 2, 2008, the Company's wholly owned subsidiary ESW Canada,
Inc., completed its negotiations with Royal Bank of Canada and entered into an
amendment to the secured commercial loan agreement originally entered into March
19, 2007. The amendment to the Agreement extends the term of the Agreement from
June 30, 2008 through June 30, 2009. In addition to extending the term of the
Agreement, certain financial covenants have also been amended. The new
arrangement in the agreement provides for a revolving facility available by way
of a series of term loans of up to $750,000 to finance future production orders
to cover direct costs such as material and labour for specific sales orders. The
facility has been guaranteed to the bank under Export Development Canada's (EDC)
pre shipment financing program. Borrowings under the revolving credit agreement
bear interest at 1 1/2 percent above the institution's prime rate. Repayments of
the loan are required no later than one year from the date of the advancement of
the loan. Obligations under the revolving credit agreement are collateralized by
a first-priority lien on the assets of the Company and its subsidiary ESW Canada
Inc. including, accounts receivable, inventory, equipment and other tangible and
intangible property, including the capital stock of all direct subsidiaries.
At September 30, 2008 and December 31, 2007, $313,430 and nil respectively was
owed.
12
NOTE 9 - REDEEMABLE CLASS A SPECIAL SHARES
700,000 Class A special shares $ 453,900 (based on the historical
Authorized, issued, and exchange rate at the time of
outstanding. issuance.)
The Class A special shares are issued by the Company's wholly-owned subsidiary
BBL Technologies, Inc. ("BBL") without par value, and are redeemable on demand
by the Holder of the shares which is a private Ontario Corporation at $700,000
CDN (which translates to $657,771 USD at September 30, 2008). As the Class A
special shares were issued by the Company's wholly-owned subsidiary BBL, the
maximum value upon which the Company is liable is the net book value of BBL. As
at September 30, 2008 BBL has an accumulated deficit of $1,198,261 USD
($1,851,054 CDN as at September 30, 2008) and therefore, the holder would be
unable to redeem the Class A special shares at their ascribed value.
NOTE 10 - INCOME TAXES
As at September 30, 2008, there are loss carryforwards for Federal income tax
purposes of approximately $19,780,781 available to offset future taxable income
in the United States. The carryforwards expire in various years through 2026.
The Company does not expect to incur a Federal income tax liability in the
foreseeable future. Accordingly, a valuation allowance for the full amount of
the related deferred tax asset of approximately $6,923,274 has been established
until realizations of the tax benefit from the loss carryforwards are more
likely than not.
Additionally, as at September 30, 2008, the Company's two wholly owned Canadian
subsidiaries had loss carryforwards of approximately $3,852,264 can be used, in
future periods, to offset taxable income. The deferred tax asset of
approximately $1,390,667 has been fully offset by a valuation allowance until
realization of the tax benefit from the loss carryforwards are more likely than
not.
13
For the period ended
September 30,
2008 2007
----------- -----------
Statutory tax rate:
U.S 35.0% 35.0%
Foreign 36.1% 36.1%
Income (loss) before income taxes:
U.S $(2,741,368) $(3,835,653)
Foreign (2,577,892) 3,812,174
----------- -----------
$(5,319,260) $ (23,479)
----------- -----------
Expected income tax (recovery) expense $(1,890,098) $ 33,716
Differences in income tax resulting from:
Depreciation (Foreign operations) $ (3,593) $ 66,798
Stock Based Compensation 4,776 271,695
----------- -----------
$(1,888,915) $ 372,209
Benefit of losses (gains) not recognized 1,888,915 $ (372,209)
----------- -----------
Income tax provision (recovery) per financial statements $ 0 $ 0
----------- -----------
Deferred income tax assets and liabilities consist
of the following difference:
As at
September 30,
2008 2007
------------ ------------
Assets
Capital Assets - Tax Basis (Foreign operations only) $ 1,995,508 $ 1,592,416
Capital Assets - Book Value (Foreign operations only) (1,710,939) (1,878,328)
------------ ------------
Net Capital Assets $ 284,569 $ (285,912)
Tax loss carry forwards 23,633,045 17,235,201
------------ ------------
Net temporary differences (foreign operations only) $ 23,917,614 $ 16,949,289
Statutory tax rate:
U.S 35.0% 35.0%
Foreign 36.1% 36.1%
Temporary differences (foreign operations only) 8,416,671 5,933,297
Valuation Allowance (8,416,671) (5,933,297)
------------ ------------
Carrying Value $ 0 $ 0
============ ============
14
Effective January 1, 2007, the company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities.
There was not a material impact on the company's consolidated financial position
and results of operations as a result of the adoption of the provisions of FIN
48. The Company does not believe there will be any material changes in its
unrecognized tax positions over the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax
benefits within the income tax expense line in the consolidated statement of
operations. Accrued interest and penalties will be included within the related
tax liability line in the consolidated balance sheet.
In many cases the Company's uncertain tax positions are related to tax years
that remain subject to examination by tax authorities. The following describes
the open tax years, by major tax jurisdiction, as of September 30, 2008:
United States - Federal 2004 - present
United States - State 2004 - present
Canada - Federal 2005 - present
Canada - Provincial 2005 - present
Valuation allowances reflect the deferred tax benefits that management is
uncertain of the ability to utilize in the future.
NOTE 11 - ISSUANCE OF COMMON STOCK
For the nine months ended September 30, 2008 there was nil issuance of common
shares.
NOTE 12 - STOCK OPTIONS AND WARRANT GRANTS
A total of $13,646 and $776,271 for stock based compensation has been recorded
for the nine months ended September 30, 2008 and 2007, respectively. The Company
used the simplified method for computing the expected term of the option.
On February 7, 2008 the board of directors granted the aggregate award of
400,000 stock options to five employees, two executive officers and one
director. The options have immediate vesting with an exercise price of $0.71 and
$1.00 per share (above fair-market value at the date of grant) with exercise
periods ranging from three and five years from the date of award.
On February 13, 2007 the board of directors granted the aggregate award of
2,450,000 stock options to eight employees, two executive officer/directors and
four outside directors. The options have immediate vesting with an exercise
price of $0.71 per share (fair-market value at the date of grant) with exercise
periods ranging from three and five years from the date of award.
A summary of option transactions, including those granted pursuant to the terms
of certain employment and other agreements is as follows:
STOCK WEIGHTED
PURCHASE AVERAGE
OPTIONS EXERCISE PRICE
-------------- --------------
Outstanding, January 1, 2007 5,246,667 $0.60
Granted 2,450,000 $0.71
Expired (45,000) ($0.50)
Exercised (655,000) ($0.45)
---------- ------
Outstanding, December 31, 2007 6,996,667 $0.65
Granted 100,000 $0.71
Granted 300,000 $1.00
Expired (1,276,667) ($0.65)
---------- ------
Outstanding, September 30, 2008 6,120,000 $0.65
15
At September 30, 2008, the outstanding options have a weighted average remaining
life of 26 months.
The weighted average fair value of options granted during 2008 and 2007 was
$0.93 and $0.71 respectively and was estimated using the Black-Scholes
option-pricing model, and the following assumptions:
2008 2007
-------- --------
Expected volatility 49-52% 56-69%
Risk-free interest Rate 3.00% 5.00%
Expected life 1.5 to 2.5 yrs 1.5 to 2.5 yrs
Dividend yield 0.00% 0.00%
Forfeiture rate 0.00% 0.00%
The Black-Scholes model used by the Company to calculate options and warrant
values, were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock purchase options and warrants. These models also
require highly subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the calculated values.
Accordingly, management believes that this model does not necessarily provide a
reliable single measure of the fair value of the Company's stock options and
warrants.
At September 30, 2008, the Company had outstanding options as follows:
NUMBER OF OPTIONS EXERCISE PRICE EXPIRATION DATE
---------------- -------------- ---------------
250,000 0.27 August 6, 2013
50,000 0.45 April 20, 2009
500,000 0.50 May 1, 2009
1,750,000 0.50 August 11, 2009
150,000 0.50 December 1, 2009
175,000 0.71 February 16, 2010
2,150,000 0.71 February 16, 2012
795,000 1.00 December 31, 2010
100,000 0.71 February 3, 2011
100,000 1.00 February 7, 2011
100,000 1.00 February 7, 2013
---------------
6,120,000
---------------
Warrants issued in connection with various private placements of equity
securities, are treated as a cost of capital and no income statement recognition
is required. A summary of warrant transactions is as follows:
WEIGHTED
WARRANT AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding, January 1, 2007 6,322,500 $ 0.93
Granted -- --
Exercised (20,000) $ (0.85)
Expired (3,030,000) $ (0.85)
---------- --------
Outstanding, December 31, 2007 3,272,500 $ 1.28
Granted -- --
Exercised -- --
Expired (3,272,500) $ (1.28)
---------- --------
Outstanding, September 30, 2008 -- $ --
---------- --------
16
There are no outstanding warrants as of September 30, 2008.
NOTE 13 - RELATED PARTY TRANSACTIONS
During the period ended September 30, 2008 and 2007, the Company paid
shareholders and their affiliates $100,000 and nil, respectively for various
services rendered in addition to salaries and reimbursement of business
expenses. All transactions are recorded at the exchange amounts. A director and
shareholder of the company, provides consulting services to the company under a
consulting agreement. The agreement provides for a monthly retainer of $12,500
per month. Any one transaction or combination attributed to one individual or
entity exceeding $120,000 on an annual basis has been disclosed.
The Company has two unsecured subordinated promissory notes in the principal
amount of $2,308,148, $1,002,589. The $2.3 million Note was issued to a company
controlled by a trust of which a director and shareholder of our Company is the
beneficiary. Total interest accrued on the $2.3 million consolidated Note for
the quarter ended September 30, 2008 amounted to $352,896. The $1.0 million Note
was issued to a director and shareholder of our Company. Total interest accrued
on the $1.0 million Note for the quarter ended September 30, 2008 amounted to
$146,272. The Company also has a series of seven unsecured subordinated
promissory notes totaling in the principal amount of $1,068,000. Total interest
accrued on the $1,068,000 Notes for the quarter ended September 30, 2008
amounted to $23,481. (See Note 7).
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEASES
Effective November 24, 2004, the Company's wholly owned subsidiary ESW America
Inc. entered into a lease agreement for approximately 40,220 square feet of
leasehold space at 2 Bethlehem Pike Industrial Center, Montgomery Township,
Pennsylvania. The leasehold space houses the Company's research and development
facilities. The lease commenced on January 15, 2005 and expires January 31,
2010.
Effective December 20, 2004, the Company's wholly owned subsidiary ESW Canada
Inc. entered into an offer to Lease agreement for approximately 50,000 square
feet of leasehold space in Concord Ontario Canada. The leasehold space houses
the Company's executive offices and a high volume manufacturing plant. The
possession of the leasehold space took place on May 24, 2005 and the term of the
lease will run for a period of 5 years from the commencement date of July 15,
2005.
The following breakdown is the total, of the minimum annual lease payments, for
both leases.
2008 $ 117,764
2009 476,976
2010 163,075
The Company has no pending lawsuits.
17
CAPITAL LEASE OBLIGATION
The Company is committed to the following lease payments in connection with the
acquisition of capital assets under capital leases:
2008 $ 4,770
2009 19,080
2010 11,263
2011 2,462
2012 1,026
---------
$ 38,601
Less imputed interest 4,698
---------
Total obligation under capital lease 33,903
Less current portion 13,336
---------
Total long-term portion $ 20,567
=========
The Company has incurred $3,263 interest expense on capital leases for the year.
NOTE 14 - LOSS PER SHARE
Potential common shares of 6,120,000 related to ESW's outstanding stock options
were excluded from the computation of diluted earnings/(loss) per share for the
period ended September 30, 2008. As at September 30, 2007, 6,996,667
antidilutive stock options and 3,272,500 antidilutive stock warrants have been
excluded from the computation of diluted earnings per share as the effect of
inclusion of these shares and the related interest expense would have been
antidilutive.
The reconciliation of the number of shares used to calculate the diluted loss
per share is estimated as follows:
For the Nine Month Period ended For the Three Month Period ended
Ended September 30, Ended September 30,
2008 2007 2008 2007
Numerator
Net (Loss) / earnings for the period $ (5,319,260) $ (23,479) $ (1,453,201) $ (226,389)
Interest on debentures $ 0 $ 171,636 $ 0 $ 49,636
Amortization of debenture fair value $ 0 $ 123,803 $ 0 $ 35,803
Interest on notes to related party $ 263,764 $ 209,178 $ 101,775 $ 75,104
---------------------------------------------------------------
$ (5,055,496) $ 481,138 $ (1,351,426) $ (65,846)
Denominator
Weighted average number of shares outstanding 72,973,851 60,481,262 72,973,851 61,645,511
Dilutive effect of :
Stock options -- -- -- --
Warrants -- -- -- --
Convertible Debt conversion -- -- -- --
Note Payable Conversion -- -- -- --
---------------------------------------------------------------
Diluted weighted average shares outstanding -- -- -- --
18
NOTE 15 - COMPARATIVE FIGURES
Certain 2007 figures have been reclassified to conform to the financial
statements presentation adopted in 2008. The presentation includes Other
Comprehensive Income in the Consolidated Condensed Statement of Operations and
Consolidated Condensed Statement Of Changes In Stockholders Equity (Deficit).
NOTE 16 - SUBSEQUENT EVENTS
Effective October 8, 2008 the Company completed a drawdown in the sum of
$130,000 under the $1,500,000 Credit Facility Agreement with Mr. Bengt Odner
(See Note 7). Pursuant to the Agreement, the Company requested drawdown(s) under
the Facility of $130,000 for general working capital purposes. The drawdown
under the facility was approved and was provided for in the sum of $130,000 from
Mr. Odner. The sums received by the Company in connection with the drawdown is
represented by 9% unsecured subordinated demand promissory notes issued by the
Company to Mr. Odner in the amount of $130,000 pursuant to the Facility.
Effective October 24, 2008 the Company completed a drawdown in the sum of
$55,000 under the $1,500,000 Credit Facility Agreement with Mr. Bengt Odner (See
Note 7). Pursuant to the Agreement, the Company requested drawdown(s) under the
Facility of $55,000 for general working capital purposes. The drawdown under the
facility was approved and was provided for in the sum of $55,000 from Mr. Odner.
The sums received by the Company in connection with the drawdown is represented
by 9% unsecured subordinated demand promissory notes issued by the Company to
Mr. Odner in the amount of $55,000 pursuant to the Facility.
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of convertible debentures to six (6) accredited investors under Rule 506
of Regulation D.
The Debentures are for a term of three (3) years and are convertible into shares
of the Company's common stock at the option of the holder by dividing the
principal amount of the Debenture to be converted by $0.25. The Debentures earn
interest at a rate of 9% per annum payable in cash or in shares of the Company's
common stock at the option of the holder. If the Holder elects to receive
interest in shares of common stock, the number of shares of common stock to be
issued for interest shall be determined by dividing accrued interest by $0.25.
Subject to the holder's right to convert, the Company has the right to redeem
the Debentures at a price equal to one hundred and ten percent (110%) multiplied
by the then outstanding principal amount plus unpaid interest to the date of
redemption. Upon maturity, the debenture and interest is payable in cash or
common stock at the option of the Holder. The Debentures contain customary price
adjustment protections.
The Company has provided the Debenture holders with cost free registration
rights whereby the Company has agreed to use its best efforts to file a
registration statement for the shares underlying the Debentures within one
hundred twenty (120) days of closing.
From the proceeds, the Company has elected to repay $2.2 million, the principal
portion only, of a previously issued promissory note to Ledelle Holdings
Limited, a company controlled by a trust to which Mr. Bengt Odner, a director
and shareholder of the Company is the beneficiary. Ledelle has agreed to have
the remaining amount of $433, 923, due under the note, to be applied to a
subscription to a Debenture under the offering. (See Note 7)
The Company has agreed to repay a promissory note that it had previously issued
to Mr. Odner in the principal amount of $1.02 million. Mr. Odner has agreed to
have the full amount of principal and accumulated interest, in the amount
of$1,158,024 due under the note, applied to a subscription of a Debenture under
the offering. Additionally, as previously reported, the Company's $1.5 million
credit facility also provided by Mr. Odner, which the Company has drawn down the
sum of $1,103,000 as of November 7, 2008, will also be satisfied by way of
issuance of Debentures under the offering. With the agreement to settle all the
notes previously issued by the Company, Mr. Odner is subscribing to an aggregate
of $2,566,077 of Debentures under the offering. (See Note 7)
The Company will also be repaying $150,000 in principal and interest due to a
shareholder of the Company who by separate agreement with Mr. Odner and the
Company agreed to provide funding to the Company under the credit facility. (See
Note 7)
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our Financial
Statements and Notes thereto included elsewhere in this Report.
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of our business.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release any modifications or revisions to these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, we
caution investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, us. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance,
or achievements to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements. This
report should be read in conjunction with our Annual Report on Forms 10-KSB, and
amendments thereto for the year ended December 31, 2007 as filed with the
Securities and Exchange Commission.
GENERAL OVERVIEW
Environmental Solutions Worldwide Inc. is a publicly traded company engaged
through its wholly owned subsidiaries ESW Canada Inc. and ESW America Inc. (the
ESW Group of Companies) in the design, development, ISO 9001:2000 certified
manufacturing and sales of environmental technologies. The ESW Group of
Companies currently manufacture and market a diversified line of catalytic
emission control products and support technologies for diesel, gasoline and
alternative fuelled engines. The ESW Group of Companies also operates a
comprehensive EPA/CARB/MSHA recognized emissions testing and verification
laboratory.
Our primary business objective is to capitalize on the growing global
requirement of reducing emissions, by offering catalyst technology solutions to
the market and build upon our military product lines to continue sales to the
U.S. and NATO countries. We have and continue to seek to develop relationships
with OEM's of engines for both automotive and other markets. As part of our
efforts to grow our business, as well as to achieve increased production and
distribution efficiencies we have and continue to make capital investments in
manufacturing capability to support our products as well as expensing money on
research and development in order for new products to be developed that meet the
new legislative regulations.
The field of emission control is very complex and requires a variety of
different technologies to be employed. We are currently developing additional
products that meet the needs of our customers and which meet industry standards.
We have partnered with several strategic alliances assuring immediate access to
leading edge technologies that address the needs of our global customer base.
Both our facilities are in full compliance with ISO 9001:2000. We currently hold
a full registration certificate effective until March 2010 for ESW America and
January 2010 for ESW Canada.
Our largest customer to date has been International Truck and Engine Corporation
(International), the operating company of Navistar International Corporation. On
November 8, 2007 we announced that we signed an Emissions Control and
Technologies Provider and Cooperation agreement with International. Our
relationship with International has been important to our past growth. In 2007
our revenues from sales to end users, through International, was 90% of total
revenues, or approximately $ 8.4 million. We expect this percentage of revenue
could be significant in the future as a result of sales of diesel catalytic
converter products that are currently being verified by the Environmental
Protection Agency (EPA) and California Air Resources Board (CARB). Being North
America's biggest diesel engine, truck and bus manufacturer, International has
the potential to capture a significant share of the retrofit truck and bus
market in the U.S. and provides us direct access to that market. We expect that
International may be important to our growth for ESW technology products, and
our other products worldwide.
20
We also intend to continue our efforts to develop innovative products and
manufacturing processes to serve our customers better globally and improve our
product mix and profit margins. This quarter we expensed $200,923 in research
and development costs. We are reducing our dependence on our current proprietary
products by introducing new products and systems and acquiring other product
lines. Sales depend on the success of efforts to develop and market the
products, and there can be no certainty that those efforts will succeed. However
the following information highlights our efforts and the feedback and results
has been very encouraging.
We recently received orders from International for our proprietary Level III
diesel catalyst branded ThermaCat(TM). The ThermaCat(TM) is engineered to reduce
the highest level of Particulate Matter (PM) while operating in low temperature
applications such as school buses and waste truck haulers. The ThermaCat(TM) is
currently in the verification process with the CARB and EPA for both `on and
offroad' applications. As an important part of the verification process, units
have been installed on several applications and have logged thousands of
accumulative durability hours.
As well, we are expecting that the emissions testing on the Company's Clean
Cat(TM) Level I High Performance Diesel Oxidation Catalyst (HP-DOC) at Southwest
Research Institute (SwRI), to commence in the forth quarter. Once testing begins
at SwRI, the program will take approximately one week. At the conclusion of the
testing, the Data will be consolidated and the results submitted to EPA for the
issuance of the final Executive Order for this product.
In July of 2008 we successfully completed a comprehensive catalyzed /muffler
design and engineering program for the Korean based off-road construction
Original Equipment Manufacturer (OEM), Doosan Infracore America Corporation
(DIA). The program involved the replacement of the DIA factory muffler, on their
DL200 Wheel Loader, with our catalyzed modular muffler. The new product, based
on our California Air Resources Board verified (2)Level II Particulate
Reactor(TM), was successfully tested by DIA in Korea for diesel engine emission
reductions as well as vehicle integration. Subsequent to the successful testing,
we manufactured and delivered the required units to DIA in September of 2008.
This past month, in October of 2008, one of our products, the XtrmCat(TM) Diesel
Oxidation Catalyst (DOC), was listed as an `Emerging Technology' from the U.S.A.
Environmental Protection Agency (EPA). We applied to EPA to have the XtrmCat(TM)
DOC listed as an `Emerging Technology' based on the fact that DOC's have not yet
achieved stand alone EPA verification status on EMD 2 stroke marine/locomotive
engines. We worked closely with EPA to establish the test plan for this new
technology, such as providing data from Southwest Research Institute (SwRI) to
support the claim that our product was capable of reducing 25% or greater
Particulate Matter (PM). This achievement was demonstrated with the XtrmCat(TM)
DOC installed as a post turbo catalyst/muffler application on the EMD test
engine and required no other engine modifications. With this new listing, end
users such as marine operators are now capable of applying for grant funding for
installing the XtrmCat(TM) under the EPA administered program. We are now
working towards implementing the necessary steps for final verification in both
field use and at SwRI's testing facility. We believe, once EPA verifies, the
XtrmCat(TM), it will give the Company a great head start in the
marine/locomotive emissions retrofit sector.
During this past year the Company has been pursuing various financing
initiatives. Most Companies have felt the affect of global tightening credit
markets. However, on November 3, 2008, we raised an additional $6.0 million
whereby we issued convertible debentures at terms that management feels is fair
and will help the Company to pursue its objectives. Concurrently, the company
has settled all outstanding promissory notes, partially in cash from the
proceeds of the offering and partially by the issuance of convertible
debentures. As we have a substantial amount of indebtedness, our ability to
generate cash, both to fund operations and service our debt, is also a
significant area of focus for our Company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.
21
COMPARISON OF THREE MONTH PERIOD ENDED SEPTEMBER 30, 2008 TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2007
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations (MD&A) should be read in conjunction with the MD&A
included in our Annual Report on Forms 10-KSB, and amendments thereto for the
year ended December 31, 2007
Revenues for the three month period ended September 30, 2008 decreased by
$1,997,988 or 81.8 percent, to $445,775 from $2,443,763 for the three month
period ended September 30, 2007. There was a net loss for the quarter which
amounted to $1,453,201. The revenue decline can be attributed to the fact that
the last period included the sale of 300 shroud Scat-R-shield units to the U.S.
military which did not recur in the current period. In the current period the
company focused its efforts on developing the next generation of diesel catalyst
products to meet new regulations.
Cost of sales as a percentage of revenues for the three month period ended
September 30, 2008 was 71.7 percent compared to 35.2 percent for the three month
period ended September 30, 2007. The gross profit for the three month period
ended September 30, 2008 was 28.3 percent as compared to a gross margin of 64.8
percent for the three month period ended September 30, 2007. The orders produced
in this period had low volumes associated with production. Efficient economies
of scale would be achieved on higher volumes as well; the product sold in the
prior year three month period had higher margins.
Marketing, office and general expenses for the three month period ended
September 30, 2008 decreased by $76,819, or 8.4 percent, to $836,498 from
$913,317 for the three month period ended September 30, 2007. The decrease is
primarily due to decreases in sales and marketing salaries and wages of $41,855
as during the current period we reduced staff. General and administration cost
decreased by $36,860 as a result of lower sales activity. Debt accretion
decreased by $35,803 as we had no outstanding convertible debt this period.
Investor relations expense was lower by $47,566, in the previous year the
company held several Investor road shows which were not repeated in the current
period. These decreases were offset by increases in the following areas.
Facility costs were higher over the previous period by $36,511 as a result of
low sales volumes. Administration salaries and wages were higher by $31,035 in
support of our research and development programs and plant related expenses were
higher by $17,719.
Research and development expenses for the three month period ended September 30,
2008 decreased by $56,650, or 22.0 percent, to $200,923 from $257,573 for the
three month period ended September 30, 2007. As planned, we continue to
aggressively pursue testing and research and development in our efforts to
develop innovative products to serve our customers and improve our product mix
and profit margins. We believe that this expenditure will result in increase
orders for our products.
Officer's compensation and director's fees for the three month period ended
September 30, 2008 increased by $19,166 or 14.9 percent, to $148,166 from
$129,000 for the three month period ended September 30, 2007. The main reason
for increase in Officers' compensation and directors' fees was the addition of
two new officers in February 2008.
Consulting and professional fees for the three month period ended September 30,
2008 increased by $5,436 or 46.0 percent, to $17,253 from $11,817 for the three
month period ended September 30, 2007. The increase is mainly attributed to
audit fees and tax consulting fees.
Foreign exchange gain for the three month period ended September 30, 2008 was
$7,926 as compared to a loss of $104,942 for the three month period ended
September 30, 2007. This is a result of the fluctuation in the exchange rate of
the Canadian Dollar to the United States Dollar.
Depreciation and amortization expense for the three month period ended September
30, 2008 decreased by $2,364, or 0.8 percent to $283,233 from $285,597 for the
three month period ended September 30, 2007.
22
Interest expense on the notes payable to related party was $101,775 for the
three month period ended September 30, 2008 as compared to $75,104 for the three
month period ended September 30, 2007. The Company may prepay the Consolidated
Notes without penalty at any time.
COMPARISON OF NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008 TO NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2007
RESULTS OF OPERATIONS
Revenues for the Nine month period ended September 30, 2008 decreased by
$8,386,769 or 93.5 percent, to $584,261 from $8,971,030 for the Nine month
period ended September 30, 2007. The net loss for the Nine month period ended
September 30, 2008 amounted to $5,319,260. The revenue decline can be attributed
to the fact that the previous period included the sale of 1000 shroud
Scat-R-shield units to the U.S. military which did not reoccur in the current
period. In the current period the company focused its efforts on developing the
next generation of diesel catalyst products to meet new regulations; these
products are expected to generate revenues in the latter part of 2008 and 2009.
Cost of sales as a percentage of revenues for the Nine month period ended
September 30, 2008 was 72.6 percent compared to 36.0 percent for the Nine month
period ended September 30, 2007. The gross profit for the Nine month period
ended September 30, 2008 was 27.4 percent as compared to a gross margin of 64.0
percent for the Nine month period ended September 30, 2007. Some of the orders
produced in this period were mainly sample or prototype orders that have low
volumes associated with production. Efficient economies of scale would be
achieved on higher volumes.
Marketing, office and general expenses for the Nine month period ended September
30, 2008 increased by $96,534, or 3.5 percent, to $2,852,191 from $2,755,657 for
the Nine month period ended September 30, 2007. The increase is primarily due to
increases in sales and marketing salaries and wages of $203,543 as during the
first six months of the current period we had more staff to support our internal
sales infrastructure in preparation for the release of our new products. We also
participated in several industry trade shows. Administration salaries and wages
increased by $71,720 in support of our research and development programs.
Facility costs increased over the previous period by $175,612 due to reduced
sales volumes. These increases were offset by decreases in the following areas.
Debt accretion decreased by $123,803 as we had no outstanding convertible debt
this period and plant related expenses were lower by $70,571 as a result of
lower sale volumes, general and administration cost reduced by $47,147and
investor relations expense was lower by $112,820 attributed to a reduction in
investor road shows held in the current period.
Research and development expenses for the Nine month period ended September 30,
2008 increased by $493,573 or 89.6 percent, to $1,044,215 from $550,642 for the
Nine month period ended September 30, 2007. As planned, we continue to
aggressively pursue testing and research and development in our efforts to
develop innovative products to serve our customers and improve our product mix
and profit margins. We believe that this expenditure will result in increased
orders for our products.
Officer's compensation and director's fees for the Nine month period ended
September 30, 2008 decreased by $650,757 or 59.4 percent, to $444,478 from
$1,095,235 for the Nine month period ended September 30, 2007. The main reason
for the decrease in Officers' compensation and directors' fees was Stock based
compensation expense which amounted to $9,773 in the current period compared to
$710,330 in the prior period offset by a marginal increase due to the addition
of two new officers in February 2008.
Consulting and professional fees for the Nine month period ended September 30,
2008 decreased by $66,042 or 160.4 percent, to $107,226 from $41,184 for the
Nine month period ended September 30, 2007. The increase is mainly attributed to
audit fees, tax consulting fees and fees related to compliance activities for
requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Foreign exchange gain for the Nine month period ended September 30, 2008 was
$65,372 as compared to a loss of $155,893 for the Nine month period ended
September 30, 2007.This is a result of the fluctuation in the exchange rate of
the Canadian Dollar to the United States Dollar.
23
Depreciation and amortization expense for the Nine month period ended September
30, 2008 increased by $30,230, or 3.7 percent to $853,353 from $823,123 for the
Nine month period ended September 30, 2007.
Interest expense on the notes payable to related party was $263,764 for the Nine
month period ended September 30, 2008 as compared to $209,178 for the Nine month
period ended September 30, 2007. The Company may prepay the Consolidated Notes
without penalty at any time.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 2007, our principal sources of operating capital have been the proceeds
from our various financing transactions. In 2007 we generated cash from
operations. In the first three quarters of 2008 we used a substantial amount of
cash as our sales were low. As of September 30, 2008, the Company had cash and
cash equivalents of $ 22,127. The Company has been pursuing various financing
initiatives; and on November 3, 2008, we raised and additional $6.0 million
whereby we issued convertible debentures. (See below under Debt Structure).
Net Cash used in operating activities for the Nine month period ended September
30, 2008 amounted to $3,729,647. This amount was attributable to the loss of
$5,319,260, plus non cash expenses such as depreciation, amortization, and
others of $1,299,026 and an increase in net operating assets and liabilities of
$290,587.
Net Cash used in investing activities was $404,131 for the Nine month period
ended September 30, 2008 as compared to $394,440 for the Nine month period ended
September 30, 2007. The capital expenditures this year were primarily dedicated
to enhancement of our production capabilities to meet requirements of our new
products currently being developed.
Net cash provided by financing activities totaled $1,372,819 for the Nine month
period ended September 30, 2008 as compared to $890,243 provided by financing
activities for the Nine month period ended September 30, 2007. In the current
period the company received $1,068,000 under a Credit Facility Agreement with a
director and shareholder of the Company, $313,430 was borrowed against our line
of credit agreement with the Royal Bank of Canada and the company repaid $8,611
under its capital lease obligation.
In 2007, our subsidiary, ESW Canada entered into a $2.5 Million revolving credit
facility with Royal Bank of Canada, to finance orders on hand. This credit line
will provide us with the working capital to complete larger contracts. On
November 2, 2007 the credit facility, which originally had an expiry date of
November 30, 2007, has been extended to June 30, 2008. Effective September 2,
2008, we completed our negotiations with Royal Bank of Canada and entered into
an amendment to the secured commercial loan agreement originally entered into
March 19, 2007. The amendment to the Agreement extends the term of the Agreement
from June 30, 2008 through June 30, 2009. In addition to extending the term of
the Agreement, certain financial covenants have also been amended. The new
arrangement in the agreement provides for a revolving facility available by way
of a series of term loans of up to $750,000 to finance future production orders.
The Credit Facility is guaranteed by the Company and its subsidiary ESW Canada
through the pledge of their assets to secure RBC. The Credit Facility bears
interest at a base rate of one and a half percentage (1 1/2%) points above the
Canadian prime rate. At the time ESW Canada entered into the extension and
amendment to the Credit Facility, there was no outstanding obligations due to
RBC under the Credit Facility.
On November 3, 2008, we completed a transaction whereby we issued $6.0 million
of convertible debentures to six (6) accredited investors under Rule 506 of
Regulation D. The Debentures are for a term of three (3) years and are
convertible into shares of the Company's common stock at the option of the
holder by dividing the principal amount of the Debenture to be converted by
$0.25. We used $2.2 Million of the cash to pay down a previously issued
promissory note as well as settling all the other notes previously issued by the
Company. In addition to the $6.0 million, an additional $3.0 Million of
convertible Debt has been issued. Currently we have $9.0 million of Convertible
debt all at the same terms and conditions. (See Debt structure for full
details.)
24
The global emissions industry is highly competitive; winning and maintaining new
business requires suppliers to rapidly produce new and innovative products on a
cost-competitive basis. Because of the heavy capital and engineering investment
needed to maintain this competitiveness, the investments made in 2006 and 2007
should help us to capitalize on the numerous supply opportunities considered to
be the core to our future success.
The expansion focused on increasing production capacity, expanding our research
and development facility, and a commitment to develop new products and improving
customer service. In addition, the expansion and capital expenditures made and
our intent to capitalize on an anticipated increase in demand for our products
are the steps that we have taken to become profitable and generate positive cash
flow. Based on our current operating plan, management believes that at September
30, 2008 anticipated cash flows from operating activities and the appropriate
borrowings under our credit facility and other available financing sources, such
as the November 3, 2008 private placement transaction whereby we issued $6.0
million of convertible debt, will be sufficient to meet our working capital
needs on a short-term basis. Overall, capital adequacy is monitored on an
ongoing basis by our management and reviewed quarterly by the Board of
Directors.
Our industry is capital intensive and there is a timing issue bringing product
to market which is considered normal for our industry. We continue to spend
money on research and development to prove up our technologies and bring them to
the point where our customers have a high confidence level allowing them to
place larger orders. The length of time a customer needs to build confidence in
our technologies cannot be exactly predetermined and as a result, during the
first three quarters of 2008, we sustained an operating loss as a result of not
generating sufficient sales to generate a profit from operations. Although this
indicated a potential working capital deficiency and a possibility of the
Company's ability to continue to operate as going concern, management does not
believe that this is of a substantial financial concern as we have a good
history of receiving capital infusion when needed. In these tight global credit
markets, on November 3, 2008, we were able to secure a $6.0 million private
placement of convertible debentures. There is no assurance that the Company will
be successful in achieving sufficient cash flow from operation. However, more
significantly, we believe that the revenue will increase once we obtain
verification on certain products that are currently in the testing stages and we
believe will be verified by CARB, MSHA and the EPA during 2008 and 2009.
Our principal source of liquidity in 2007 was cash provided from prior financing
activities along with a small amount contributed from operations. In 2007, we
also received funds from the exercise of options and warrants. While it is
anticipated that we will not produce sufficient cash from operations in 2008 to
support our expenditures, the November 3, 2008 $6 Million issuance of debt along
with continued borrowing on our credit facility will allow us the opportunity to
support our operations and to execute and complete our business plan. Our
principal use of liquidity will be to finance any further capital expenditures
needed, to provide working capital availability and to pay previously issued
debt. We do not anticipate having any major capital expenditures in 2008 related
to the general operation of our business, however should the need arise for
further tooling or equipment as a result of specific orders or the introduction
of new product lines, we would evaluate the need and make provisions as
necessary. Our Board of Directors may explore alternative listings of our Common
Stock if deemed beneficial to our shareholders. If we were to seek an
alternative listing of our Common Stock, we may incur significant capital
expenditures beyond those anticipated for our general business operations.
Disciplined capital expenditure decisions, focused on investments made for
maintaining high quality service, cost structure improvement, and cash flow
generation are essential. We do not expect that total capital expenditures for
2008 will amount to more than $500,000.
Should we not be profitable, we will need to continue to finance our operations
through other capital financings. We may continue to seek equity and/or debt
financing in the form of private placements at favourable terms, or the exercise
of currently outstanding options that would provide additional capital. However,
such additional financing may not be available to us, when and if needed, on
acceptable terms or at all. We intend to retain any future earnings to retire
debt, finance the expansion of our business and any necessary capital
expenditures, and for general corporate purposes.
25
Our operating profitability requires that we increase our sales and lower our
overall cost to manufacture our products and improve both sales and
administrative productivity through process and system enhancements. This will
be largely dependent on the success of our initiatives to streamline our
infrastructure and drive our operational efficiencies across our company. Our
failure to successfully implement these initiatives, or the failure of such
initiatives to result in improved profit margins, could have a material adverse
effect on our liquidity, financial position, and results of operations.
We believe the success of our newly developed products will continue to motivate
others to develop similar designs, many of the same functional and physical
characteristics as our product. We have patents covering the technology embodied
in our products, and intend to enforce those patents as appropriate. If we are
not successful in enforcing our patents, competition from such products could
adversely affect our market share and prices for our products. Although overall
pricing has been stable recently, the average price of our products may decline
in the future. There is no assurance that our current or future products will be
able to successfully compete with products developed by others.
DEBT STRUCTURE
During the fiscal year 2006, we issued three unsecured subordinated promissory
notes of $0.5 million, $1 million, and $1.2 million totalling $2.7 million to a
company controlled by a trust to which a director and shareholder of our Company
is the beneficiary. The notes bear interest at 9% per annum. The holder of the
$1 million and $1.2 million notes issued on August 29, 2006 and June 26, 2006
respectively, has the option to receive payment of principal and all accrued
interest in the form of restricted shares of the Company's common stock, par
value ($0.001) with cost free piggyback registration rights. Under this
repayment option, interest will be calculated at 12% per annum. On January 9,
2007, the Company paid back the $0.5 million subordinated promissory note it had
previously issued on November 13, 2006 in the principal amount of $500,000 by
paying the Holder the sum of $506,780 in cash, representing $500,000 principal
and $6,780 interest. Subsequently, On February 9, 2007, the above two unsecured
subordinated promissory notes in the principal amount of $1.0 million and $1.2
million were consolidated into one unsecured subordinated demand note with
principal amount of $2,308,148. This Consolidated Note, is due and payable to
Holder upon demand. As with the original Promissory Notes, the Consolidated Note
will continue to bear interest at a rate of 9% per annum if principal and
interest are paid by the Company in cash, or if principal and interest are paid
in shares of restricted common stock of the Company, the Consolidated Note will
bear interest at a rate of 12% per annum. The Company may prepay the
Consolidated Note without penalty at any time. With the raise of $6.0 Million on
November 3, 2008 the Company has elected to repay $2.2 million, the principal
portion only, of this Note to Ledelle Holdings Limited. Ledelle has agreed to
have the remaining amount of $433, 923, due under the note, to be applied to a
subscription to a Debenture offering.
On February 15, 2007 the Company issued a $500,000 unsecured subordinated demand
promissory note to a member of the Company's Board of Directors. This Note also
bears interest at 9% per annum and is payable upon demand. Subsequently, on
March 7, 2007, the Company entered into an agreement whereby it borrowed an
additional sum of $500,000 from a member of the Company's Board of Directors and
consolidated this sum with the principal and accrued interest of the $500,000
unsecured demand promissory note previously issued on February 15, 2007. This
Consolidated Note is in the principal amount of $1,002,589 and bears interest at
a rate of 9% per annum and is payable upon demand. The Company may prepay the
Consolidated Note without penalty at any time. With the raise of $6.0 Million on
November 3, 2008 the Company has elected to repay this Note and the holder has
agreed to have the full amount of principal and accumulated interest, due under
the note, in the amount of $1,158,024 applied to a subscription to a Debenture
offering.
As at September 30, 2008, $499,168 of interest payable on the $1,002,589, and
the $2,308,147 promissory notes has been accrued. We believe that the terms of
the promissory notes are fair and reasonable and have been negotiated as arms
length transactions.
26
Effective June 2, 2008, the Company entered into a Credit Facility Agreement
with Bengt Odner a director and shareholder of the Company. Pursuant to the
Agreement, the Company can request draw down(s) under the Facility of up to
$1,500,000 in the aggregate with funds to be used for general working capital
purposes. All request(s) to draw down under the Facility are subject to Mr.
Odner's consent and approval. An approved draw down by the Company under the
Facility will be represented by a 9% unsecured subordinated demand promissory
note issued by the Company to Mr. Odner or his designee. The Company may repay
the Note at anytime without penalty. At the option of the Note holder, in lieu
of cash, principal and interest earned on the Note can be repaid in restricted
common stock of the Company. Should the Note holder elect to receive stock of
the Company, interest on principal will be calculated at a rate of 12% per
annum. The number of shares of Common Stock to be issued in satisfaction of
interest and principal shall be determined by dividing the principal and accrued
interest by the greater of 105% of the twenty (20) day average closing price of
the Company's Common Stock immediately preceding the date the Note holder elects
to have the Note satisfied with Common Stock, or the Closing Price on that date.
Under no circumstance can the conversion price be below the fair market price of
the Company's Common Stock on the date the Note holder elects to have the Note
satisfied with Common Stock. The Company may request draw down(s) under the
Facility through December 31, 2008.
On June 2, 2008, concurrent with entering into the Credit Facility Agreement,
the Company issued a Request for Issuance pursuant to the terms of the Facility
for the sum of $500,000 with said funds to be used for general working capital.
The Request for Issuance was approved and the Company issued a $500,000 Note in
favour of Mr. Odner Subsequently, six requests totaling $568,000 were issued and
were approved. As at September 30, 2008 $23,481 of interest payable has been
accrued on the seven promissory notes in the total principal amount of
$1,068,000. As of November 3, 2008 the sum of $1,103,000 was due to Mr. Odner
under the credit facility. The Company has agreed to settle all the notes
previously issued by the Company, under the credit facility by way of issuance
of Debentures under an offering. The debenture offering amounted to $1,408,053.
The Company will also be repaying $150,000 in principal and interest due to a
shareholder of the Company who by separate agreement with Mr. Odner and the
Company agreed to provide funding to the Company under the credit facility.
On November 3, 2008, the Company completed a transaction whereby it issued $6.0
million of convertible debentures to six (6) accredited investors under Rule 506
of Regulation D. The Debentures are for a term of three (3) years and are
convertible into shares of the Company's common stock at the option of the
holder by dividing the principal amount of the Debenture to be converted by
$0.25. The Debentures earn interest at a rate of 9% per annum payable in cash or
in shares of the Company's common stock at the option of the holder. If the
Holder elects to receive interest in shares of common stock, the number of
shares of common stock to be issued for interest shall be determined by dividing
accrued interest by $0.25. Subject to the holder's right to convert, the Company
has the right to redeem the Debentures at a price equal to one hundred and ten
percent (110%) multiplied by the then outstanding principal amount plus unpaid
interest to the date of redemption. Upon maturity, the debenture and interest is
payable in cash or common stock at the option of the Holder. The Debentures
contain customary price adjustment protections. The Company has provided the
Debenture holders with cost free registration rights whereby the Company has
agreed to use its best efforts to file a registration statement for the shares
underlying the Debentures within one hundred twenty (120) days of closing.
Our ability to service our indebtedness in cash will depend on our future
performance, which will be affected by prevailing economic conditions,
financial, business, regulatory and other factors. Certain of these factors are
beyond our control. We believe that, based upon our current business plan, we
will be able to meet our debt service obligations when due. Significant
assumptions underlie this belief, including, among other things, that we will be
successful in implementing our business strategy, that some of our new products
receive verification from the appropriate regulatory authorities, and that there
will be no material adverse developments in our business, liquidity or capital
requirements. If we cannot generate sufficient cash flow from operations to
service our indebtedness and to meet our other obligations and commitments, we
might be required to refinance our debt or to dispose of assets to obtain funds
for such purpose. There is no assurance that refinancing or asset dispositions
could be effected on a timely basis or on satisfactory terms, if at all, or
raise funds through asset sales, sales of equity or otherwise, our ability to
pay principal and interest on our debt would be impaired. On such circumstance,
we would have to issue shares of our common stock as repayment of this debt,
which would be of a dilutive nature to our present shareholders.
27
NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133
("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
and its related interpretations, and (3) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years beginning after November 15,
2008. We will be required to adopt SFAS 161 in the first quarter of 2009. We
currently do not have any derivative financial instruments subject to accounting
or disclosure under SFAS 133; therefore, we do not expect the adoption of SFAS
161 to have any effect on our consolidated statement of financial position,
results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how a company recognizes assets acquired, liabilities assumed, contractual
contingencies and contingent consideration measured at fair value at the
acquisition date. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effect of the business
combination. SFAS 141R is effective for fiscal years beginning after December
15, 2008. We will consider the effect of SFAS 141 and its impact on any future
acquisitions.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51" (SFAS 160").
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interest of the
parent and the interest of the noncontrolling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect the
adoption of SFAS 160 to have any impact on its financial position, results of
operation or cash flows.
28
In February 2007, the Financial Accounting Standards Board FASB) issued
Statement of Financial Accounting Standards )SFAS) No. 159, "The Fair Value
Option for Financial assets and Financial Liabilities -- including an amendment
of FASB Statement No. 115," (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other assets and liabilities at
fair value on an instrument-by-instrument basis (the fair value option)> SFAS
159 becomes effective for the Company on January 1, 2008. The Company has
evaluated the adoption of this bulletin and concluded that it did not have any
material impact on the financial statements.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are summarized in Note 2 to the Consolidated
Financial Statements included in our 2007 Annual Report to Shareholders. In
preparing our financial statements, we make estimates and assumptions that
affect the expected amounts of assets and liabilities and disclosure of
contingent assets and liabilities. We apply our accounting policies on a
consistent basis. As circumstances change, they are considered in our estimates
and judgments, and future changes in circumstances could result in changes in
amounts at which assets and liabilities are recorded.
FOREIGN CURRENCY TRANSACTIONS
The results of operations and the financial position of our operations in Canada
is principally measured in Canadian currency and translated into U.S. dollars.
The future effects of foreign currency fluctuations between U.S. dollars and
Canadian dollars will be somewhat mitigated by the fact that certain expenses
will be generally incurred in the same currency in which revenues will be
generated. The future reported income of our Canadian subsidiary would be higher
or lower depending on a weakening or strengthening of the U.S. dollar against
the Canadian currency. The Company has a net gain on foreign exchange due the
weakening of the Canadian dollar to the U.S. Dollar during the first nine months
of 2008
A portion of our assets are based in its foreign operation and are translated
into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, Accordingly, our consolidated stockholders' investment will
fluctuate depending upon the weakening or strengthening of the Canadian currency
against the U.S. dollar.
Adjustments resulting from our foreign subsidiaries' financial statements are
included as a component of other comprehensive income within stockholders equity
because the functional currency of subsidiaries are non-USD.
Our strategy for management of currency risk relies primarily upon conducting
our operations in the countries' respective currency and we may, from time to
time, engage in hedging intended to reduce our exposure to currency
fluctuations. At September 30, 2008, we had no outstanding forward exchange
contracts.
29
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL CONTROLS
The Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" as of the end of the period covered by this
report. This evaluation was done with the participation of management, under the
supervision of the Chief Executive Officer ("CEO") and Chief Accounting Officer
("CAO").
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a cost
effective control system, misstatements due to error or fraud may occur and not
be detected. The Company conducts periodic evaluations of its internal controls
to enhance, where necessary, its procedures and controls.
CONCLUSIONS
Based on our evaluation, the CEO and CAO concluded that the registrant's
disclosures, controls and procedures are effective to ensure that information
required to be disclosed in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Security Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS
Not applicable.
30
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS.
In evaluating an investment in our common stock, investors should consider
carefully, among other things, the risk factors previously disclosed in Part I,
Item 1 of our Annual Report to the Securities and Exchange Commission for the
year ended December 31, 2007, as well as the information contained in this
Quarterly Report and our other reports and registration statements filed with
the Securities and Exchange Commission. There have been no material changes in
the risk factors as previously disclosed under "Risk Factors" in Part I, Item 1
of our Annual Report to the Securities and Exchange Commission for the year
ended December 31, 2007.
ITEM 5. OTHER INFORMATION
On October 15, 2008 the Company filed a Current Report on Form 8-K dated October
15, 2008 reporting that the Company completed a drawdown of the sum of $ 130,000
under its previously reported Credit Facility Agreement.
On October 27, 2008 the Company filed a Current Report on Form 8-K dated October
27, 2008 reporting that the Company completed a drawdown of the sum of $ 55,000
under its previously reported Credit Facility Agreement.
On November 7, 2008 the Company filed a Current Report on Form 8-K dated
November 7, 2008 reporting that the Company completed a transaction whereby it
issued $6.0 million of convertible debentures to six (6) accredited investors
under Rule 506 of Regulation D.
ITEM 6. EXHIBITS
EXHIBITS:
31.1 Certification of Chief Executive Officer and President pursuant to the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Accounting Officer, pursuant to the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: NOVEMBER 14, 2008
Concord, Ontario Canada
ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.
BY: /S/ DAVID J. JOHNSON
--------------------
DAVID J. JOHNSON
CHIEF EXECUTIVE OFFICER AND PRESIDENT